Some Considerations on Debt and Interest Rates

This chapter is devoted to the study of the consequences of large fiscal imbalances on long-term interest rates and on the yield curve. Starting from theoretical considerations, it offers a vector error correction analysis on the USA, Germany and Italy over the 1983-2009 period. Results suggest that fiscal fundamentals significantly affect long term interest rates, although the response of government bond rates to fiscal shocks seems to be inversely related to the market size and to its international integration. In the USA real rates decrease following an increase in the debt/GDP ratio, while the opposite happens in Germany and Italy.